Crown Castle International Corp. (CCI) had a strong quarter increasing yoy revenue by over 34%, exceeding the high end of guidance. AFFO per share was up 24% but fell short of broad estimates. Discussing a possible S/MTUS merger, management noted overlapping sites account for about 5% of total revenue. CCI maintains a target dividend growth rate of 7-8% annually. The company continues to work on balance sheet improvement and has reduced its leverage ratio to 5.1x. Investment has been focused on small cell and fiber where they expect long term growth trends to be in the low double digits.
Current Price: $102 TTM Return: 10.4%
Target Price: $125 Position Size: 2%
Thesis intact, highlights on the quarter:
Secular growth trends on track:
- Q1 total site rental revenue up 34.5%; Q4 AFFO up 24%
- $16m ahead of expectations; driven mostly by long-term agreement with AT&T for $12m
- Increased demand for wireless data is primary driver and mobile data demand expected to double every 2 years.
- Carriers need capacity and CCI is a low cost solution and fast to market.
- New leasing activity is accelerating. Lease-up on small cells about 2x the rate they experienced on towers.
- Churn remains low at 1-2%.
Capital spending by carriers may improve:
- Big 4 carriers make up 90% of site rental revenue – AT&T, Sprint, T-Mobile and Verizon. Corporate tax reform may prompt them to increase infrastructure investments.
- CCI announced small cell pipeline increase to 30k from 25k
- AT&T may begin constructing their FirstNet emergency network which will be funded in part by the government.
- Exposure to T-Mobile and Sprint accounts for 19% and 14% of overall revenue respectively
- Overlapping tenancy between two carries accounts for about 5% of revenue with average of 5-7 years left on the contracts
Expect investments in small cell and fiber to ultimately yield mid-to-high teens returns
- CCI continues to deploy capital toward fiber investments; first tenant yields 5-6% while a second tenant will yield 10-12%
- Fiber opportunities providing long term opportunity for high growth
- Closed three acquisitions in 2017: FiberNet, Wilcon and Lightower, expanding their high capacity metro fiber assets
- Assets have capacity to support organic growth and high incremental margins.
- Return assumptions on these fiber asset acquisitions based on current applications, i.e. new technologies like 5G, IoT, augmented and virtual reality would be upside
- These technologies all would rely on CCI infrastructure assets for higher speed and lower latency requirements.
- If 5G comes to fruition, as expected, there is a stair step increase in densification required.
- Attractive shared economic model in small cell business. Lowest cost and fastest time to market for their customers.
- Multiple ways to monetize fiber assets improves returns and lowers cost and value proposition to customers.
Valuation:
- Strong AFFO growth will drive the valuation (up 16% in 2017). They have a 10 year AFFO CAGR of 14%.
- High incremental margins means AFFO growth should outpace site rental revenue growth.
- Low maintenance capex (~2% of revenue) supports high AFFO margins.
- $2.2B in AFFO ($5.50/share) in 2018 is a yield of 5%. This is an attractive yield given the secular growth potential.
The Thesis on Crown Castle:
1. CCI is well positioned to capitalize on secular mobile data demand growth and small cell/urban opportunity.
2. Strong competitive position. Leading US tower company.
3. Toll booth business – offensive (secular growth) & defensive (4% dividend & contracted cash flows) characteristics.
4. Revenues derived from long term contracts with price escalators and good visibility.
$CCI.US
Peter Malone, CFA
Research Analyst
Direct: 617.226.0030
Fax: 617.523.8118
Crestwood Advisors
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Boston, MA 02109
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